How do IRS Resources Affect the Corporate Audit Process?

Abstract

This study investigates how Internal Revenue Service resources affect the IRS audit process for publicly traded corporations. Using confidential IRS audit data, we examine the effect of IRS resources on the incidence and magnitude of proposed deficiencies and settlement outcomes. We find that IRS resources are positively associated with both the likelihood and magnitude of proposed deficiencies, but negatively associated with the proportion of proposed deficiencies collected. These results are consistent with the IRS focusing on fewer positions, but targeting positions supported by weaker taxpayer facts when resources are more limited. Based on our findings, we estimate the loss in tax collections from audits of LB&I corporate tax returns alone exceeds the savings from reductions in the IRS enforcement budget. This study contributes to the literature examining the strategic game between tax authorities and corporate taxpayers and has important implications for policymakers, particularly in light of recent IRS budget cuts.

Does FIN 48 Improve Firms' Estimates of Tax Reserves?

“…The size of firms with IRS‐proposed deficiencies and settlements increases post‐FIN 48. We view this as consistent with trends in IRS budget constraints (Kubick, Lockhart, Mills, and Robinson ; Nessa, Schwab, Stomberg, and Towery ), changes in the Coordinated Industry Case program (Ayers, Seidman, and Towery ), and continued merger activity through the decade contributing to a smaller number of audit cases, representing a higher proportion of large firms.…”

Indicators of Tax Authority Monitoring: Firm Characteristics, Tax Avoidance and Reinvestment Allowance Utilisation

“…The primary responsibilities of a tax authority are to regulate tax compliance (Murphy, 2008), collect income tax from individuals and business entities (Nessa, Schwab, Stomberg, & Towery, 2016) besides administering tax administrative obligations (IRBM, 2018). In Malaysia, IRBM conducts two types of tax audits, namely the field and the desk audits.…”

“…Previous literature predominantly highlights the importance of tax audit (Desai et al, 2007), the effects of tax audit (Brushwood et al, 2018;Hanlon et al, 2014), the likelihood and determinants of tax audit (Bozanic et al, 2017), the interaction between taxpayers and tax authority (Ayers, Seidman, & Towery, 2017;Beuselinck et al, 2014) and how tax authority conducts an audit within given resources (Kubick et al, 2017;Nessa et al, 2016). This study examines the indicators of tax authority monitoring, concentrating on firms that claim RA based on the tax returns report where details such as firm characteristics and tax avoidance indicators are considered.…”

“…The indicators used for selecting audit cases remains a mystery where only tax authorities hold the information about the selection process. However, the audit selection can be predicted as stated by Nessa et al (2016) where they claimed that an understanding of tax authority's resources, such as the reduction or increase in the financial budgets and the strength of a tax authority's employees, would allow taxpayers to pre-empt the likelihood of facing a tax audit. A study by Hoopes et al (2012) highlighted that firms can identify the trend of tax audit activities by paying attention to leadership and structural changes of the tax authority, government revenue trends, changes in financial accounting standards, hiring of former tax officers, having conversations with firms experiencing audits as well as analysing the historical annual audit coverage data released by the tax authority.…”

The Governance of Tax Audit Enforcement: Indicators on Automation Incentive, Tax Avoidance and Firm Characteristics

“…Nessa et al 2016). This research examined the indicators of tax audit enforcement, concentrating on the fundamental information reported in tax returns and financial statements such as firm characteristics and tax avoidance indicators.…”